(Reuters) - The U.S. Environmental Protection Agency said on Tuesday it needs more time to decide whether to approve an industry request to boost the amount of ethanol blended into gasoline, but signaled that it believes newer American cars could safely handle the higher fuel mix.

The EPA was supposed to decide by Dec. 1 on a petition from Growth Energy filed on behalf of 54 ethanol producers to let gasoline contain up to 15 percent ethanol.

U.S. gasoline is now approved to contain up to 10 percent ethanol, which is made mostly from corn.

The U.S. ethanol industry was hard hit in 2008 by the economic downturn and a drop in crude oil prices to nearly $30 a barrel. Many companies were forced into bankruptcy and a large percentage of production capacity was idled.

Profit margins have since improved with oil price rising to around $80 a barrel, and ethanol producers would be further helped by increasing the blending limit to 15 percent.

While farmers who provide the corn to make ethanol also support the initiative, automakers asked the EPA during the summer not to approve higher blends until the agency had test results showing the fuel would not damage vehicle engines.

The EPA said it needs more time to review test data on the effects a higher ethanol-gasoline ratio would have on vehicles.

The EPA expects to have final testing data on the effects of higher-blended ethanol by mid-June, the agency said in a letter to Growth Energy.

"We want to make sure we have all necessary science to make the right decision," the EPA said.

But the agency said initial tests show vehicles built after 2001 "will likely be able to accommodate" gasoline blended with as much as 15 percent ethanol, commonly known as E15.

Growth Energy welcomed the EPA's announcement, saying it indicates the agency was preparing to approve E15 upon the completion of ongoing tests.

"It looks very favorably to go to E15 by the middle of next year," said Tom Buis, chief executive of Growth Energy. He added that if his group had not filed its petition, the United States would be years away, instead of months, from using E15.

Following the EPA's announcement, shares in Archer Daniels Midland Co, the second-largest U.S. ethanol producer, rose $1.09 to $31.90, up more than 3.5 percent. Privately held Poet is the No. 1 producer.

Shares of Green Plains Renewable Energy, the fourth-largest ethanol producer by volume, rose $1.25 on Tuesday to $12.86, or 10.77 percent.

The Renewable Fuels Association, the trade group for ethanol producers, slammed the EPA's delay, saying it "threatens to paralyze" the U.S. ethanol industry.

The group said the EPA should immediately approve intermediate ethanol blends, such as gasoline containing 12 percent ethanol, while the agency finishes its testing on E15.

Because the EPA has never allowed U.S. automakers to use gasoline blends with more than 10 percent ethanol, companies had no reason to design, test or provide warranties for vehicles that use higher ethanol blends, the group said.

Farm groups and the struggling ethanol industry pressed for the higher blend as it would boost demand for their product.

But there is also pressure from some critics who oppose the idea of using food -- in this case corn -- to produce fuel.

The Obama administration supports the ethanol industry because it reduces the need for some imported oil.

Some green groups, however, dispute the claim that ethanol is good for the environment because it comes mostly from corn in the United States and modern farming uses petroleum-based fuel to run machinery and make fertilizer. So a lot of energy is used to make a gallon of ethanol.

Energy legislation passed by Congress in 2007 set binding targets for fuel blending each year, with ethanol use rising from 4 billion gallons in 2006 and 11.1 billion gallons in 2009 to 20.5 billion by 2015 and 36 billion by 2022.

"To achieve the renewable fuel requirements in future years, it is clear that ethanol will need to be blended into gasoline at levels greater than the current limit of 10 percent," the EPA said.

http://www.reuters.com/article/CARMFG/idUSN0149521120091201